In a High Market, Investors Should Prepare for a Downturn

A recent article by Jeff Sommer of The New York Times poses the question: “Is this the top of the market? Is it time to sell?” “Simply put,” writes Sommer, “my answer is this: If you’re a stock investor, be prepared for a major decline, not because one is necessarily coming soon but because no one can predict where the markets are heading.” The article points out that the current economic expansion is the third longest since 1854, and that the low volatility has been “almost supernatural.” Regarding the risk of a decline, Sommer offers comments by Vanguard principal Fran […]

Indicators of a Market Top

Market tops tend to have three characteristics in common, and only one of them is reflected in the current environment, according to a recent article in Barron’s. The article cites comments by columnist Mark Hulbert, who refers to valuation metrics such as P/E, price-book, price-sales and price-dividend ratios as weak indicators of market tops but adds that we ignore them “at our peril, since it’s also true that almost all bull market tops in history have begun when they signal that the market has become overvalued.” Other indicators are: A “struggling” financial sector—The article cites Ned Davis Research data showing […]

Grantham Sets the Record Straight

In a recent Barron’s article, Boston-based asset management firm GMO’s co-founder Jeremy Grantham sets the record straight after what he calls “a few misquotes and misunderstandings by journalists.” The journalists, writes Grantham, implied that he believes high share prices are here to stay and that “regression to the mean has ended. This is, of course,” he asserts, “inaccurate, as readers of my quarterly letters know.” Grantham emphasizes his belief that the speed of mean regression has abated and become “sticky.” The slowdown, he explains, has occurred because “nearly all of the factors causing it are themselves unlikely to change fast. […]

Rob Arnott is Pro-Emerging Market Investment

Countries don’t have to be great to see significant market growth, according to Research Affiliates’ CEO Rob Arnott as explained in a recent Investment News article. In fact, the article says, since Arnott first recommended emerging markets in January, the “average diversified markets fund has gained 7.8%, and 17.8% since the February low.” He believes the asset class offers “an unusual three-way combination of low valuations, depressed currencies and strong momentum.” Here’s how: Low valuations: Arnott uses the Shiller PE ratio (which uses 10-year historical inflation-adjusted earnings) as a basis for his argument and says that, by that measure, emerging […]

Are Value Investors Really “Valuation” Investors?

Even though there has been a lot of commentary around current high stock valuations against lackluster earnings growth for the S&P 500, it is “neither practical or precise” for an investor to use this as a basis for lowering their exposure to stocks or selling their portfolio. This according to Miles Johnson of the Financial Times who writes, “Warnings about irrational stock valuations fail the test of practical advice because they inherently require an unspoken reliance on market timing.” Index investing, says Johnson, relies on both average price-earnings multiples as well as a collection of unrelated companies and industries to […]